“I'm
ready to be insulted as being insufficiently democratic, but I want to be
serious... I am for secret, dark debates.”

“Of
course there will be transfers of sovereignty. But would I be intelligent to
draw the attention of public opinion to this fact?”

“If
it's a Yes, we will say ‘on we go,’ and if it’s a No we will say ‘we
continue.’”

“We
all know what to do, we just don't know how to get re-elected after we’ve done
it.”

–
All quotes from Jean-Claude Juncker, prime minister of Luxembourg and president
of the European Commission

I’ve
been busily writing a letter on oil and energy, but in the middle of the
process I decided yesterday that I really needed to talk to you about the Bank
of Japan’s “surprise” interest-rate move to -0.1%. And I don’t so much want to
comment on the factual of the policy move as on what it means for the rest of
the world, and especially the US.

But
before we go there, I also want to note that today
is Iowa, and so we’re about to turn a big corner in what is fast
becoming one of the wackiest years in American political history. I’m going to
sit down tonight after the caucus results come in and write to you again, for a
special edition
of Thoughts from the Frontline
that will hit your inbox tomorrow. Along with Iowa, I want to delve into the
issue of what a “brokered convention” would mean for the Republican Party, and
what one would look like.

QE Failed, So Why Not Double Down?

I have
been steadfastly maintaining that the Bank of Japan was going to augment its
quantitative easing stance sometime this spring. Inflation has not come close
to their target, and the country’s growth is dismal, to say the least. So the
fact that the Bank of Japan “did something” was not a surprise. I will however admit
to being surprised – along with the rest of the world – that they chose to do
it with negative interest rates. Especially given the fact that Kuroda-san had
specifically said in testimony to parliament only a few days earlier that he
was not considering negative interest rates.

While
this development is significant for Japan, of course, I think it has broader
implications for the world; and the more I think about it, the more nervous I
get. First let’s look at some facts.

Conspiracy
theorists will love this Bank of Japan timeline:

Jan 21
– Kuroda emphatically tells Japanese parliament he is not considering NIRP.

Jan 22
– Kuroda flies to Davos.

Jan 29
– Kuroda enthusiastically embraces NIRP and promises more of it if needed.

So,
whom did he talk to in Davos, and what did they say to change his mind?

In an
email exchange I had with Rob Arnott about the Bank of Japan, he reminded me of
that wonderful Jean-Claude Juncker quote wherein he states, “When it gets
serious, you have to lie.” Which, given my theme, ties in well with another of
his quotes: “I'm ready to be insulted as being insufficiently democratic, but I
want to be serious... I am for secret, dark debates.”

Haruhiko
Kuroda, according to reports, came back from that testimony to parliament and
instructed his staff to prepare a set of documents outlining all the potential
choices, along with their pros and cons, to be ready for the next BOJ meeting
when he got back from Davos.

To
pretend that he walked into that meeting without having had lengthy talks about
whether to pursue negative interest rates strains credulity – and it just
wouldn’t be very Japanese. The conduct of business and governance in Japan
relies heavily on a process called nemawashi,
or “stirring the roots”: the outcome of any important meeting is decided ahead
of time through private discussions among those who will participate. In any
case, the vote to take rates into negative territory came down to a razor-thin
5 to 4, so you can be damn sure Kuroda knew exactly who was with him and who
was not. You do not take a vote like that and lose – not and remain chairman.

The
entire world has been watching the European experiment. Four countries in
Europe are now at negative rates (see graph below). Two others are so close
that it hardly makes a difference. The Federal Reserve and the Bank of England
are both at 0.5%.

Switzerland,
Denmark, and Sweden all lowered their rates to make their currencies less
attractive, since the franc, the krone, and the krona had appreciated too
strongly against the faltering euro. Meanwhile, the ECB is trying to stimulate
the Eurozone economy and create inflation. The question is, exactly how many
unintended consequences will there be with negative rates?

(For
the record, to my knowledge none of the banks charge negative rates on required
reserves, just on excess reserves. Excess reserves are defined as money on
deposit at a bank in excess of whatever the regulators think is necessary to
fund the bank’s operations. The concept of excess reserves is a totally
artificial one. Aggressive banks will keep reserves as low as possible in order
to make maximum returns, and conservative banks will of course hold more
reserves. Where do you want to put your money? Then again, if you’re looking to
borrow money, which bank do you go to?)

The
people that NIRP (negative interest rate policy) hurts the most are those who
are living on their savings or trying to grow their retirement accounts, but
apparently our all-wise central banks have decided that a little pain for them
is worth the potential for growth in the long run. Savers in both Germany and
Japan have to buy bonds out past seven years just to see a positive return.
Some 29% of European bonds now carry a negative interest rate. Recently we have
seen Japanese corporate bonds paying negative interest.

Sidebar:
if I am a Japanese corporation and somebody is willing to pay me to lend me
money, why am I not backing up the truck and seeing how much the market will
give me? Then turn around and invest the money in fixed-income assets? Just
asking…

Whatever
turmoil the Bank of Japan had already created was apparently not enough to
concern a majority of its board, so they have moved to negative interest rates.

Let’s
shift from Japan to the US. Last week, former Fed chair Ben Bernanke said in an
interview
that the Fed should consider using negative rates to counter the next serious
downturn. “I think negative rates are something the Fed will and probably should
consider if the situation arises,” he said.

The
same story at MarketWatch mentioned that former Fed Vice-Chairman Alan Blinder
has already suggested using negative interest rates for overnight deposits.

And
Janet Yellen, who said in her confirmation testimony to Congress in 2013 that
the potential for negative interest rates to cause disruption was significant,
now says they are an option the Fed would consider.

We
often refer to the herd mentality when we talk about investors. Economic
academicians and central bankers are equally prone to bovine behavior. Theirs
is a slow-moving herd, to be sure, but it raises much dust as it lumbers.

One of
the biggest “aha” moments of my life came as I listened to David
Blanchflower, former Bank of England governor (during last decade’s financial
crisis), in a debate a few summers ago at Camp Kotok, the Maine fishing retreat
I attend every August. The debate centered around whether the Fed and the Bank
of England should have engaged in quantitative easing.

Blanchflower
shared a rather chilling description of what was going on at the time and made
the point that, as bad off as the banks were in the US, they might have been
worse off in England. They were literally days from a total collapse. Liquidity
had to be provided – and that is the one true and worthwhile purpose of central
banks (but then they double down). Blanchflower’s argument was that you could
not sit in the BOE’s meetings, see how impossible the situation was, and do
nothing. You had to act.

In
such a predicament you rely upon your best instincts and education and
training, and then you act. And you hope that the actions you take do more good
than harm.

Now,
let’s fast-forward right into the future and the next recession in the US,
which will probably be part and parcel of a global recession. Major central
banks everywhere will be lowering rates, engaging in quantitative easing, and
in some cases going even deeper into negative interest rates.

You
sit on the Federal Open Market Committee. Almost everyone in the room with you
is a committed Keynesian. That is the bulk of your training and experience,
too, and everyone agrees with you. You are going to take actions that are in
alignment with your theoretical understanding of how the world works.

And
your theory says that you need to reduce the cost of money so that people will
borrow and spend. You know that doing so will hurt savers, but it is more
important that you get the economy moving again.

What
do you do? You are hearing from everyone that the dollar is too strong and is
hurting US business. You worry about the unintended consequences of taking the
world’s reserve currency into negative-interest-rate territory, but the staff
economists are handing you papers that argue persuasively that the best
possible alternative is negative rates. So you throw in the towel.

Which
is pretty much the situation Kuroda-san was in when he came back from Davos –
his staff economists (who have had much the same training as the Fed economists
have) were waiting for him. Yes, and he may have received assurances from the
central bankers of other countries who have already gone negative, but you
don’t make such a decision based on a few conversations. Kuroda had been
thinking about negative rates for a long time.

You
have to understand that in the world of truly elite economists, everyone knows
everyone. Many of them went to the same schools, and they regularly talk at
conferences, in private meetings, and by phone and email. I can guarantee you
that they are talking about if and when it might be necessary for the US to go
down the path of negative interest rates. The policy makers are not committed
to following that path, but they are certainly talking about it. When they tell
us it’s an option, we need to take them seriously.

I have
been in the room (under Chatham House rules, so I cannot reveal when or where
or who) with some of the world’s most elite economists (Nobel laureates, etc.),
who were privately advocating that the US should pursue not just 2% but 4%
inflation. This is not the language I hear when they are interviewed in public.
They very well get the seriousness of our current economic predicament, but
their academic theory tells them that the way to resolve that predicament is
with more quantitative easing and even lower rates.

You
need to understand that economists have faith in their theories in the same way
that many people have faith in their religion.

We
need to seriously contemplate and war-game in our investment committee
meetings, in meetings with our investment advisors, etc., what negative
interest rates would mean for our portfolios. You do not want to wait until the
last minute, when negative rates are already an adopted policy, to try to
react. NIRP is not going to happen in the US this week or this month, and I
seriously doubt we’ll even see negative rates this year; but if it’s on the
table at the Federal Reserve, then you need to have it on the table as a
distinct possibility.

Negative Short-Term Rates

Four
months ago Lacy Hunt wrote about the negative consequences of a negative interest-rate
policy. I sent that to you as an Outside
the Box, but let’s excerpt a few paragraphs:

The
Fed could achieve negative rates quickly. Currently the Fed is paying the
depository institutions 25 basis points for the $2.5 trillion in excess
reserves they are holding. The Fed could quit paying this interest and instead
charge the banks a safekeeping fee of 25 basis points or some other amount.
This would force yields on other short-term rates downward as the banks,
businesses and households try to avoid paying for the privilege of holding
short-term assets.

No
guarantees exist that such an action would be efficacious. Heavily indebted
economies are not very responsive to such small changes in short-term interest
rates. Many negatives would outweigh any initially positive psychological
response. Currency in circulation would rise sharply in this situation, which
would depress money growth. The Fed may try to offset such currency drains, but
this would only be achievable by further expanding the Fed’s already massive
balance sheet. If financial markets considered such a policy inflationary over
the short-term, the more critically sensitive long-term yields could rise and
therefore dampen economic growth.

An
extended period of negative interest rates would lead to many adverse
unintended consequences just as with QE and ZIRP. The initial and knockoff
effects of negative interest rates would impair bank earnings. Income to
households and small businesses that hold the vast majority of their assets
with these institutions would also be reduced. As time passed a substantial
disintermediation of funds from the depository institutions and the money
market mutual funds into currency would arise. The insurance companies would
also be severely challenged, although not as quickly. Liabilities of pension
funds would soar, causing them to be vastly underfunded. The implications on
corporate capital expenditures and employment can simply not be calculated. The
negative interest might also boost speculation and reallocation of funds into
risk assets, resulting in a further misallocation of capital during a time of
greatly increased corporate balance sheet and income statement deterioration.

Lakshman
Achuthan posted an essay this week (which I sent to Over My Shoulder readers) in which he outlines
why growth in the US will slow to 1% over the next decade. He talks about the
economic establishment’s betting everything on policies of quantitative easing
and low rates. And by everything he means the global economy. Everything. Quoting:

The
math is too simple to ignore. Potential labor force growth will average ½% per
year for at least the next decade, and US labor productivity growth may well
stay around ½% a year, its rough average for the last five years. These add up
to 1% long-term potential GDP growth, which actual GDP growth can surpass only
temporarily during a cyclical upswing – and certainly not during a cyclical
slowdown. This is a challenging problem, with demographics practically set in
stone, and a boost to productivity growth realistically possible only in the
long run.

Consequently,
after years of ZIRP and QE attempting to pull demand forward from the future,
central banks are increasingly powerless when it comes to the economy itself.
They can “print” money, but not economic growth. The world is watching, so
those who are thought to walk on water cannot afford to be seen to have feet of
clay.

If
U.S. growth keeps slowing this year, recession risk will rise, and the Fed will
likely revisit ZIRP, in one way or another. The failure of Abenomics is not
inevitable, but appears increasingly probable. And while China is not yet
facing a hard landing, growth continues to slow, raising legitimate concerns
about its leaders’ capability to avoid one.

By
clinging to unrealistic growth expectations, the economic establishment has
effectively bet everything on the success of these grand experiments, and the
risk of losing that bet is rising inexorably. Ultimately, only policies that
genuinely address the challenges of demographics and productivity have a chance
to succeed. It is high time for that discussion to begin.

Lakshman
is right, but we are not really going to get that discussion, except in the
context of Keynesian policy. Which is at the very heart of the problem. There
would have to be an admission of failure by the economic establishment in order
for there to be a serious discussion. It would be like asking the Pope and all
his priests to convert to another theological viewpoint. Here and there it
could happen, but a mass shift?

In the
world of the leading economists and central bankers, “everyone” believes what
“everyone” knows to be true. All their research agrees with them, and any that
doesn’t is labeled as flawed. Any empirical evidence that shows quantitative
easing hasn’t been working is ignored or explained away, even when it is
presented by outstanding academic economists. No, quantitative easing didn’t
work because we didn’t do enough of it. Negative interest rates aren’t working
because we haven’t gone low enough.

Clearly,
QE has not worked. We have not had one year of 3%+ growth since the Great
Recession and are barely averaging 2%. Yes, if your measure is the stock market
and other financial assets that have inflated, then QE has worked quite well.
But the boost QE was supposed to deliver just hasn’t reached Main Street. One
of the basic tenets of QE and other related policies is that if you want to
increase consumption, you lower the cost of borrowing. But if out-of-control
borrowing was the original problem, then QE as a solution is kind of like
drinking more whiskey in order to sober up. And if you reduce the earnings of
those who are savers so that they are no longer able to spend, the whole
purpose of the original project – to foster economic growth – is defeated. But
we can’t acknowledge that, because if we did, we’d have to admit that our
theories don’t work. And we all know, because God knows, that our theories are
correct.

The
theme of negative interest rates is one we are going to come back to again and
again. We have little idea what NIRP’s unintended consequences to our
portfolios and to our businesses will ultimately be, but we had better start
thinking them through.

I know
we have been pushing early registration for my conference rather heavily in the
past few weeks, and I want to thank the large number of people who have already
signed up. It is going to be a dynamite conference. I really am putting
together a fabulous lineup to discuss critical economic trends and policies like
the ones we covered in this letter. And we will have a fair representation of
those who believe that QE has been precisely what was needed and has been
successful. We will get both sides of the argument. I am really not so much
interested in trying to determine the correctness of one belief or another at
the conference as I am in discerning the practical implications for our
investment portfolios and discussing how those of us who are in the money
management business need to position our clients. NIRP-proofing our portfolios
is a most vexing conundrum.

The Cayman Islands and Home

Wednesday
we fly to the Cayman Islands, where I’ll speak at the Cayman
Alternative Investment Summit, one of the biggest hedge fund and
alternative investment gatherings outside of the US. They have an impressive
lineup of speakers, and I note that this year the celebrity guest speakers are
Jay Leno and the star of my all-time favorite movie, Trading Places – Jamie Lee
Curtis. That should be fun. I just looked through the speaker list and noticed
that Pippa Malmgren, who will also be at my SIC conference, is speaking, and it
will be fun to catch up with her again. I will be on a panel (moderated by KPMG
chief economist Constance Hunter) with old and brilliant friends Nouriel
Roubini and Raoul Pal. At least I know that with those two guys there is no
need to wear a tie. Don’t tell the conference organizers this, but I will
probably be paid more per word for this panel than I have ever been paid in my
life. That is because with these three I will be lucky to get a word in
edgewise.

Theoretically,
unless the Chinese central bank decides to go to negative rates, I will write
about oil next week.

Welcome To The Currency War, Part 21: Japan Goes Negative; US To Return Fire In 2016

By: John Rubino

Well that didn't take long. Two weeks of falling share prices and the European and Japanese central banks go into full panic mode. The ECB promised new stimulus -- which the markets liked -- and then BoJ upped the ante with negative interest rates -- which the markets loved. Here's a quick summary from Bloomberg:

In surprising markets by penalizing a portion of banks' reserves, the Bank of Japan on Friday joined a growing club taking the once-anathema step of pushing some borrowing costs beneath zero.

"Negative rates are now very much the new normal," said Gabriel Stein, an economist at Oxford Economics Ltd. in London. "We've seen they are possible and we're going to see more." Negative rates once "sounded illogical," said Stein. "We now know what we thought was true isn't."

This is a resounding admission of failure. Over the past seven years the world's central banks have cut interest rates to levels not seen since the Great Depression and flooded their banking systems with newly-created currency, while national governments have borrowed unprecedented sums (in the US case doubling the federal debt). Yet here we are in the early stages of a global deflationary collapse. Commodity prices have followed interest rates to historic lows, while growth is anemic and may soon be nonexistent.The official response: More extreme versions of what has already failed. Here's a JP Morgan chart published by Financial Times that shows just how sudden the trend towards negative interest rates has been:

Future historians will have a ball psychoanalyzing the people making these decisions, and their conclusion will almost certainly be some variant of the popular definition of insanity as repeating the same behavior while expecting a different result.So what does this new stage of the Money Bubble mean? Many, many bad things.This latest leg down in bond yields presents savers (the forgotten victims of the QE/NIRP experiment) with an even tougher set of choices. Previously they were advised to move out on the risk spectrum by loading up on junk bonds and high-dividend equities. Now, after the past few months' carnage in those sectors, even the most oblivious retiree is likely to balk. But having said "no thanks" to the demonstrably dangerous options, what's left? The answer is...very little. There is literally no way remaining for a regular person to generate historically normal levels of low-risk cash income.Meanwhile, a NIRP world presents the US with a problem that perhaps only the Swiss can appreciate: As the other major countries aggressively devalue their currencies (the euro and yen are already down big versus the dollar), another round of lower interest rates and faster money printing will, other things being equal, raise the dollar's exchange rate even further.For a sense of what that might mean, recall that US corporate profits are already falling because of a too-strong dollar (see Brace for a 'rare' recession in corporate profits). Bump the dollar up another 10% versus the euro, yen and yuan, and US corporate profits might fall off a cliff. The inevitable result: Before the end of the year, the US will see no alternative but to open a new front in the currency war with negative interest rates of its own.The big banks, meanwhile, are no longer feeling the central bank love. Where falling interest rates used to be good for lenders because they energized borrowers and widened loan spreads, ultra-low rates are making markets more volatile (and thus harder to profitably manipulate for bank trading desks) without bringing attractive new borrowers through the door. The result: falling profits at BofA, JP Morgan, Goldman, et al and tanking big-bank share prices.As for gold, there are now $5 trillion of bonds and bank accounts that cost about the same amount to own as bullion stored in a super-safe vault -- and which cost more than gold and silver coins stored at home. Compared with the 5%-6% cash flow advantage that bonds have traditionally enjoyed versus gold, NIRP can't help but lead savers and conservative investors to reconsider their options. In other words, what would you rather trust: A bond issued by a government (Japan, the US, Europe -- take your pick) that is wildly-overleveraged and acting ever-more-erratically, or a form of money that has never in three thousand years suffered from inflation or counterparty risk? At some point in the process, a critical mass of people will get this.And no discussion of the unfolding financial mess would make complete sense if it left out the geopolitical backdrop. The Middle East is on fire and refugees are flooding the developed world, resurrecting old social pathologies (see Swedes storm occupied Stockholm train station, beat migrant children). Much of Latin America is sinking into chaos (see Caracas named as world's most violent city and 21 of the 50 most violent cities are in Brazil). Seeing this, who in their right mind would spend thousands of dollars to visit Egypt or Rio or even Paris right now? The answer is far fewer than a decade ago.So the old reliable economic drivers of expanding global trade and enthusiastic tourism are gone for a while, if not for decades. Central banks are, as a result, swimming against a current that is far faster -- in water that is far deeper -- than anything seen since at least the 1930s. And all they can do is pump a bit more air into their sadly-inadequate water wings.

The comatose mining stocks finally came to life today and showed signs of some determined buying, something that has been missing in the recent leg higher in the gold market.From a technical analysis perspective, the fact that they were able not only to breach that stubborn band of resistance near 125 which has kept them in check, but also managed to soar through the mid-July 2015 low near 128 is very impressive.

All that they need to do now is to take out 140 on a closing basis and we can say that they have bottomed out on a medium term basis. Short term they remain bullish now that they have bettered those two aforementioned resistance levels.The reason I have not yet turned bullish on the miners on a medium term basis is because of the following medium-term chart.

As you can see when you pan out and take a bit of a longer term view, the current move higher in the HUI is not all that impressive. The HUI has not had a weekly close above that line marked "MAJOR RESISTANCE" since early July of last year. A close through that would turn me bullish on a medium term time frame especially if the close involved being above the October 2014 spike low near 145-146.This rally may present an opportunity in the days ahead for those who are still holding an excessively lopsided position in the gold shares to whittle that down somewhat so that they can diversify and perhaps rebalance their portfolios. That being said, you would want to watch for some signs that the rally in gold has run its course, something which as of yet it has given no indication it is ready to do.

The big thing supporting the gold market at the moment is the turmoil in the foreign exchange markets which is resulting in massive deleveraging and unwinding of large positions in one direction, namely short most major currencies and long the US Dollar.As the market comes to terms with the idea that the Fed is not going to make a move in their upcoming March meeting, the dial-back in interest rate differential expectations is forcing this repositioning. That of course is resulting in large scale US Dollar selling.What is going to be incredibly fascinating to watch play out is the response from the European Central Bank and the Bank of Japan. Neither one of them can be the least bit pleased to see their respective currencies surging higher especially after both, but especially the BOJ, only just recently announced their displeasure with the Yen at current levels. We also know from the recent Mario Draghi remarks, that the ECB is incredibly frustrated with the lack of inflationary pressures across the Eurozone with Mr. Draghi repeatedly making a point of telling us all how their statisticians were going to have to lower their estimates for inflation for not only this year but also on out into 2017 and even 2018. The LAST THING they now want to see is the Euro at current levels.This is really coming down to a battle or more properly a war, between speculative interests and those two Central Banks which have made it clear that a major component, if not the major component of their plans to combat deflation and stave off a sluggish growth model is by weakening their respective currencies. With specs repositioning and being forced out of existing short positions, the sheer size of the leveraged carry trades involving those two currencies, the Yen and the Euro, is going to make defeating this unwind quite a feat.

I know that the Bank of Japan is not afraid to take on the specs but when it comes to the ECB, that is entirely another different matter. Their resolve is always iffy for among currency traders they do not have near the respect that the mere mention of the BOJ engenders.As far as gold itself goes, the metal has now run exactly to where the next chart level of resistance can be found.

Notice the downsloping trend line as it intersects with the lows made in March of last year. A push through this level will set up a legitimate shot at the October highs near $1190. Get through that and the medium term complexion of the gold chart will have changed.

When the bull resumes, strong stocks are supposed to re-emerge as leaders. But not this time.

By Michael Kahn

Relative performance analysis, also known as relative strength, tells us which stocks are leading in any market environment. Theoretically, the stocks that hold up best as the market pulls back are the ones that will lead when the correction ends. After all, if investors like a stock, it will be the last one sold in times of uncertainty. That’s indicative of demand.

Most of the leading stocks in the current bounce are the stocks that were the most beaten down. Pixabay

Unfortunately, the stocks that are leading in the market bounce that began two weeks ago are not the prior winners. With exception, most are stocks that were the most beaten down. The only conclusion I can draw is that bargain hunters are driving the rebound and a real change of mood to the bullish side is not happening.

Let’s start with the good news. Of the so-called FANG stocks – Facebook, Amazon.com, Netflix and the former Google, now called Alphabet, two, Facebook and Alphabet are back in new high ground and outperforming the market. Today, Alphabet announced better-than-expected results and shares soared after the close to a record high.

Relative performance or relative strength is simply a ratio of two stocks or a stock to an index. If the performance of the first item – Facebook - is better than the second - the market - then the relative performance chart slopes higher. If the relative performance chart starts to change, technical analysts get a potential early warning signal that the stock may be about the change course for the worse.

While Facebook did pull back between November and January its relative performance vs. the Standard & Poor’s 500 remained flat (see Chart 1). In other words, after months of outperforming the market, all this stock did was take a breather by merely matching the market.

Chart 1

Facebook

Compare that to Apple. Its relative performance chart peaked in May 2015 and did forewarn that the bullish trend was over even though prices remained flat for several more weeks (see Chart 2). With Alphabet’s rally today, Apple is no longer the biggest company by market capitalization.

Chart 2

Apple

This is important because the gang of four FANGs was widely recognized to be the market’s hot stock group. With only two coming out of corrections with strength, this leadership group is really not leading anymore.Long before the FANG acronym was in vogue, there was a group some called the market’s generals. It included the four FANGs and added such stocks as coffee purveyor Starbucks , biotech leader Gilead Sciences, sneaker maker Nike and, of course, AppleAAPL in Your ValueYour ChangeShort position. The list is subjective as everyone had their own favorite leaders but the concept was the same. As goes the generals, so go the soldiers. Right now, we can argue for the return of Starbucks to the fore with its strong breakout from a three-month slide (see Chart 3). It sports a clear change of trend, supported by such technicals as rising on-balance volume and relative strength. Also, its decline, while drawn out, was rather mild just as we’d expect from a leader.

Chart 3

Starbucks

The bad news is that a very large percentage of the stocks that populate the leaderboards right now are not quite the same as these generals. Monday morning, the percent price leaders on the New York Stock Exchange excluding stocks involved in takeover activity were mostly last year’s biggest losers. For example, US Steel ( USX ) was up nearly 5% intraday but it set a 52-week low last week. Blood management company Haemonetics released good third quarter results before the bell and the stock jumped over 8% in short order. Here, too, it traded at a 52-week low in January after losing a third of its value since last March. That is not exactly a surge back into a strong stock. Rather, it is hope for a technical turnaround that may or may not happen. The leaders list is littered with gold stocks and biotechs. The former may be stabilizing after a bear market and the latter have been falling since last summer. The rush back to scoop up good stocks at cheaper prices so far is absent.The point is that these are losers that got some interest and not leaders that are back in the lead. That’s not a good condition for the bulls.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

WASHINGTON, DC – Just when the notion that Western economies are settling into a “new normal” of low growth gained mainstream acceptance, doubts about its continued relevance have begun to emerge. Instead, the world may be headed toward an economic and financial crossroads, with the direction taken depending on key policy decisions.

In the early days of 2009, the “new normal” was on virtually no one’s radar. Of course, the global financial crisis that had erupted a few months earlier threw the world economy into turmoil, causing output to contract, unemployment to surge, and trade to collapse. Dysfunction was evident in even the most stable and sophisticated segments of financial markets.

Yet most people’s instinct was to characterize the shock as temporary and reversible – a V-shape disruption, featuring a sharp downturn and a rapid recovery. After all, the crisis had originated in the advanced economies, which are accustomed to managing business cycles, rather than in the emerging-market countries, where structural and secular forces dominate.

But some observers already saw signs that this shock would prove more consequential, with the advanced economies finding themselves locked into a frustrating and unusual long-term low-growth trajectory. In May 2009, my PIMCO colleagues and I went public with this hypothesis, calling it the “new normal.”

The concept received a rather frosty reception in academic and policy circles – an understandable response, given strong conditioning to think and act cyclically. Few were ready to admit that the advanced economies had bet the farm on the wrong growth model, much less that they should look to the emerging economies for insight into structural impediments to growth, including debt overhangs and excessive inequalities.

But the economy was not bouncing back. On the contrary, not only did slow growth and high unemployment persist for years, but the inequality trifecta (income, wealth, and opportunity) worsened as well. The consequences extended beyond economics and finance, straining regional political arrangements, amplifying national political dysfunction, and fueling the rise of anti-establishment parties and movements.

With the expectation of a V-shape recovery increasingly difficult to justify, the “new normal” finally gained widespread acceptance. In the process, it acquired some new labels. International Monetary Fund Managing Director Christine Lagarde warned in October 2014 that the advanced economies were facing a “new mediocre.” Former US Secretary of the Treasury Larry Summers foresaw an era of “secular stagnation.”

Indeed, with financial bubbles growing, the nature of financial risk morphing, inequality worsening, and non-traditional – and in some cases extreme – political forces continuing to gain traction, the calming influence of unconventional monetary policies is being stretched to its limits. The prospect that such policies will be able to keep the economic engines humming, even at low levels, looks increasingly dim. Instead, the world economy seems to be headed for another crossroads, which I expect it to reach within the next three years.

This may not be a bad thing. If policymakers implement a more comprehensive response, they can put their economies on a more stable and prosperous path – one of high inclusive growth, declining inequality, and genuine financial stability. Such a policy response would have to include pro-growth structural reforms (such as higher infrastructure investment, a tax overhaul, and labor retooling), more responsive fiscal policy, relief for pockets of excessive indebtedness, and improved global coordination. This, together with technological innovations and the deployment of sidelined corporate cash, would unleash productive capacity, producing faster and more inclusive growth, while validating asset prices, which are now artificially elevated.

The alternate path, onto which continued political dysfunction would push the world, leads through a thicket of parochial and uncoordinated policies to economic recession, greater inequality, and severe financial instability. Beyond harming the economic wellbeing of current and future generations, this outcome would undermine social and political cohesion.

There is nothing pre-destined about which of these two paths will be taken. Indeed, as it stands, the choice is frustratingly impossible to predict. But in the coming months, as policymakers face intensifying financial volatility, we will see some clues concerning how things will play out.

The hope is that they point to a more systematic – and thus effective – policy approach. The fear is that policies will fail to pivot away from excessive reliance on central banks, and end up looking back to the new normal, with all of its limitations and frustrations, as a period of relative calm and wellbeing.

- Over the past four years, the BoJ has thrown all remaining caution to the wind, with the declared goal of reviving Japan's economy and creating an annual "inflation" rate of 2%. However, it seems now that even that was not enough just yet!- The BoJ has certainly succeeded in devaluing the yen's external value and impoverishing Japan's citizens accordingly. It has also created a short-term windfall for people buying Japanese stocks.- After assuring everyone that the BoJ saw no need to add to its already enormous debt monetization program, Mr. Kuroda seems to have been convinced by recent market volatility that it was time to move on from an insane monetary policy to even more insane monetary policy.- It appears to us that the ever more desperate monetary policy measures adopted by the BoJ are coming closer and closer to crossing a point of no return. In other words, the BoJ seems to be entering what is popularly known as the "Keynesian endgame".

By Pater Tenebrarum

Let's Do More of What Doesn't Work

It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don't work. It is regarded as evidence that there hasn't been enough spending and printing yet.

At the Bank of Japan, this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn't a superior economic system after all. Then this happened:

This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn't such a good idea after all. That was not the conclusion of Japan's movers and shakers, though (or anyone else's, for that matter). Instead, it was decided that what was required were better planners, or at least a better plan.

For decades, Japanese policymakers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of "policy paralysis" - after all, these efforts were obviously just not big and bold enough!

Going Big and Failing Again

After the reelection of Shinzo Abe and the installation of Haruhiko Kuroda as BoJ governor, the BoJ decided to simply continue doing what it has always done - more than 20 years of utter failure notwithstanding. However, in deference to the admonitions of the Bernankes and Krugmans of this world, it increased the size of its meddling by an order of magnitude:

Assets held by the Bank of Japan: since Kuroda has started this "QE on steroids" program in 2012, the central bank's balance sheet has grown in parabolic fashion.

In short, over the past four years, the BoJ has thrown all remaining caution to the wind, with the declared goal of reviving Japan's economy and creating an annual "inflation" rate of 2%.

However, it seems now that even that was not enough just yet!

As an aside to this: no-one knows or can sensibly explain what lowering the purchasing power of one's currency by exactly 2% p.a. is supposed to achieve. There exists neither theoretical nor empirical evidence that could possibly support the notion that it is a desirable goal. It is just another Keynesian mantra. Central bankers have basically pulled the 2% figure out of their hats.

The BoJ has certainly succeeded in devaluing the yen's external value and impoverishing Japan's citizens accordingly. It has also created a short-term windfall for people buying Japanese stocks. To give you a rough idea how its "success" has manifested itself otherwise, here are a few charts illustrating the situation. The first one shows the quarterly annualized growth rate of Japan's machinery orders (note the most recent figure, which has been released only last week):

The most recent data point of the BoJ-engineered "recovery": machinery orders plunge by 14.4%.

And here is the monthly growth rate in manufacturing production - a sector that due to its export prowess was supposed to be an especially great beneficiary of Kuroda's destruction of the yen:

Japan's manufacturing production, monthly annualized growth rate - the December data haven't been released yet, but in light of last quarter's machinery orders, production growth will likely be back in negative territory.

In light of the enormous decline of the yen's exchange rate since 2012, one would normally expect that the BoJ has at least succeeded in achieving its bizarre goal of raising the consumer price inflation rate to 2%. Well, it did - for exactly one month. However, that was mainly due to a hike in the sales tax, so it can actually not be attributed to the BoJ. Japan's consumers have been very lucky so far - the planned assault on their wallets has turned out to be a complete dud as well:

Stock markets around the world have recently swooned, with the Nikkei delivering an especially weak performance. After assuring everyone that the BoJ saw no need to add to its already enormous debt monetization program, Mr. Kuroda seems to have been convinced by recent market volatility that it was time to move on from an insane monetary policy to even more insane monetary policy. As Reuters reports:

"The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

"What's important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it," BOJ Governor Haruhiko Kuroda told a news conference after the decisión.

Obviously, the BoJ cannot allow Draghi to get away with imposing policies that are even more crazy than its own. So it has now caught up with the lunatics running the monetary asylum in Europe. It is actually quite amusing that this admission of the complete failure of the policies implemented to date apparently caused stock markets to rally. JGB yields declined by more than 56% (!) on the day to a mere 10 basis points, and the yen got kneecapped, surrendering much of the gains it has achieved in recent weeks.

JGB yields plunge by 13 basis points to just 10 basis points - a loss of 56% in just one trading day.

The yen is murdered, surrendering a large part of the gains it has made since early December.

As to the BoJ's commitment to "achieve inflation", it may well end one day with price inflation going from zero to infinity in the space of a few months. Kuroda should be thankful that Japan's citizens haven't lost confidence in the currency yet in spite of his efforts; one of these days they will, and then it will probably be "game over" in a flash.

We should also point out that there is actually no deflation in Japan. There never has been and very likely, there never will be. Here is a chart of Japan's narrow money supply M1, which consists of currency and demand deposits:

Reuters then unquestioningly parrots the official "reasoning" for why falling prices are allegedly "dangerous" (never mind that prices haven't really fallen in Japan anyway - at best they were stable for a number of years) - readers are evidently supposed to just accept these unproven assertions as if it were perfectly obvious that they are true:

"In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise."

This shows how utterly divorced from reality today's mainstream economists and central bankers are - not to mention how lazy financial journalists are, who never seem to question this nonsense. The above assertion even flies into the face of economics 101. People buy less when prices decline? Since when? In what universe? Japanese consumers are allegedly waiting since the 1990s for "prices to fall further"? To call this utter bullsh*t feels almost like an insult to bullsh*t.

We guess the billions of people in the world who keep buying smart phones, computers, TV sets and all the other things that are continually falling in price in spite of the ministrations of central bankers must represent the "exception from the rule".

Japan's consumer price index has recently reached a new multi-decade high. Shouldn't the central bank be glad that prices have actually been stable for so long?

In his press conference, Kuroda uttered the following:

"Kuroda said the world's third-biggest economy was recovering moderately and the underlying price trend was rising steadily.

"But there's a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset," he said.

"The BOJ decided to adopt negative interest rates… to forestall such risks from materializing."

Perhaps Kuroda should instead have pondered what risks are likely to materialize on account of the imposition of negative interest rates. We have already discussed this topic extensively in the context of the ECB's decision to introduce negative rates, but here is a brief reminder:

Neither zero nor negative originary interest could possibly exist in an unhampered free market economy. Time preference cannot become zero or negative. Conceivably it could become zero if one were to fall into a black hole (it is theorized that no time passes there), or if scarcity were completely eliminated one day and no economic or technological progress would be seen as possible anymore. Neither of these hypothetical cases will ever be of practical importance.

Other than that, the only thing artificially imposed negative rates will achieve is to destroy what is left of the economy - they will slowly but surely transform prosperity into poverty. As Ludwig von Mises has warned:

"Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption. The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction.

Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to "abolish" interest will have to induce people to value an apple available in a hundred years no less than a present apple.

What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty."

As we have always said in these pages, the cunning plan of the mad hatters running the world's central banks seems to consist of making people richer by making them poorer. One can safely assume that they haven't really thought this one through.

Conclusión

It appears to us that the ever more desperate monetary policy measures adopted by the BoJ are coming closer and closer to crossing a point of no return. In other words, the BoJ seems to be entering what is popularly known as the "Keynesian endgame". Once the threshold beyond which confidence is finally lost is crossed, the long maintained sophisticated fiat money Ponzi scheme and the associated three card Monte played between central banks, commercial banks and government treasuries will come to a screeching halt.

Naturally, we cannot tell you where this threshold precisely lies or how quickly said "endgame" will be playing out. Nor do we know with any precision what gyrations we may yet see as the situation evolves. We do, however, know that Kuroda's decision has brought the world another step closer to the end. It would be a dangerous error to believe that such policies can be adopted without inviting severe consequences.

Kuroda is a member of a small coterie of central planners running the world's currency systems, who are completely divorced from reality and are playing with the savings and lives of millions. They are implementing extremely risky experiments and evidently haven't even the faintest inkling of what the ultimate outcome will be.

Unfortunately, none of us can do anything to stop them. It is therefore vitally important that one make a plan for oneself. It is quite ironic actually: the very people the economy depends on the most with respect to wealth creation are also most likely to be terrified by these developments. Consequently, they are likely to withdraw more and more from genuine wealth creation activities. They will simply be far too busy trying to save themselves while it's still possible.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.